The future of Europe's launcher sector—and by implication the global commercial launch market—will be decided this year when European Space Agency (ESA) governments opt to either add more muscle to the current Ariane 5 rocket or supplant it with a completely new launcher designed to rely less on commercial business.

Even now, ESA's two largest financial contributors, France and Germany, are haggling over the merits of an upgrade to the Ariane 5—known as the midlife evolution or Ariane 5 ME—or getting started right away on a successor, next-generation launcher that many in France have dubbed Ariane 6.

The two sides are expected to hash out a common vision by June 30, ahead of a November summit at which ESA's ministerial council will set the agency's next multiyear spending plan.

During ESA's last round of budget negotiations in 2008, an initial tranche of €355 million ($464 million) was approved to begin work on the Ariane 5 ME, a development approved with Franco-German support. Another €1.5 billion would be needed starting next year to complete work on the upgrade, which would equip the Ariane 5 with the Vinci restartable cryogenic upper-stage engine and keep prime contractor EADS-Astrium's German engineering teams busy until Europe decides on a successor rocket.

“Ariane 5 ME will be a very competitive product to be put on the market in 2016 or 2017,” Astrium Space Transportation CEO Alain Charmeau says, adding that the upgrade would equate to a 20% performance boost for the same price of an Ariane 5 launch today.

France, on the other hand, now appears ready to scrap the ME and start work on Ariane 6, a next-generation rocket that would feature a modular design less reliant on commercial launches than Ariane 5.

Designed to appeal to the global commercial market, Ariane launch vehicles have been the “go-to” rockets for satellite fleet operators worldwide for the past 20 years. With the March 23 liftoff of ESA's third Automated Transfer Vehicle (ATV-3), Europe's commercial launch consortium, Arianespace, boasts 47 consecutive Ariane 5 missions without a failure while comprising almost half of the global commercial market.

Despite this track record of reliability, the likelihood of the U.S. dollar remaining sharply lower than the euro in the coming years, coupled with emerging competition from the U.S. Falcon 9, Chinese Long March and new Indian rockets has led French government officials and some outside analysts to conclude that the relatively high cost of Ariane 5 launches can no longer be sustained.

Arianespace is already lowering operating costs by 15-20% through an uptick in launch tempo with the addition of new capabilities, including a European variant of the medium-lift Russian Soyuz rocket and a brand-new Italian-built light-launcher dubbed Vega. Ariane 5 ME could further lower costs, EADS-Astrium argues, by boosting performance with co-manifested launches weighing a combined 12,000 kg (26,455 lb.) to geostationary transfer orbit (GTO) for the same price as an Ariane 5 launch today.

The argument for Ariane 5 ME assumes the commercial market is trending toward larger, heavier satellites that can be launched two at a time. But, as Arianespace has learned, orchestrating such dual launches of commercial and sometimes government payloads is tricky, and achieving optimum payload capacity is not always possible.

Unlike the Ariane 5, which has required Arianespace to capture up to 50% of the commercial market just to break even, the Ariane 6 could get by solely on anticipated European government demand—roughly two or three launches annually—making the next-generation launcher less reliant on the commercial market than Ariane 5 or its planned upgrade. While the Ariane 6 would maintain the same launch rhythm—between five and seven annually—as its predecessor, it would do so at a much lower cost. And while Arianespace currently struggles to fill the Ariane 5's massive dual-payload capacity—currently more than 9,000 kg and up to 12,000 kg with the new upper stage—the modular Ariane 6 could accommodate launches of single spacecraft weighing 3,000-8,000 kg at a price tailored to fit customer needs. In contrast to the situation today, Arianespace would never have to worry about losing money on a launch for which it is unable to fill the rocket to capacity..

Such a business model, France argues, would mean Arianespace would no longer have to slug it out in the commercial market in order to survive. The consortium could be viable with only two or three European military or civil launches per year, with a few commercial missions to fill out the 5-7 needed to sustain the Ariane 5. Ariane 6's net effect on commercial launch prices would depend on how much of a splash new entrants to the market ultimately make. Although a less commercially reliant Ariane 6 could put upward pressure on prices, the emergence of new launchers in the U.S., China, India and Brazil would tend to drive prices down.

Over the past several months ESA has queried its largest European customers—SES, Eutelsat, Hispasat and European militaries—as to their requirements for a future launcher. SES President Romain Bausch says his company—the world's second-largest commercial satellite operator in terms of revenue—favors Ariane 6 over Ariane 5 ME.

“We see the market splitting into two groups of satellites, one 3 to 3.5 tonnes, the other 6 to 6.5 tonnes.” Bausch said on the sidelines of the Satellite 2012 conference in Washington March 12. “ESA has asked us our thoughts about the market and we have told them what we thought. It is certainly along the lines of what has been called Ariane 6, a modular vehicle capable of launching one satellite at a time, covering the two weight classes into GTO.”

ESA Director General Jean-Jacques Dordain is expected to seek design proposals from industry this month for building a next-generation launcher under a procurement strategy that would alter the 19-nation agency's acquisition approach to facilitate more competition among companies in an effort to lower development costs.

Traditionally, ESA has relied on member states to ante up funding every three years for specific development programs, leaving the agency to build the project while adhering to a geographic return policy, guaranteeing a 90% return on investment for participating countries in the form of industrial work shares.

Last year, an outside audit of Ariane 5 manufacturers found that unless European governments agreed to bend ESA's geographic return policy, the agency would be hard-pressed to find savings in the Ariane 5 program, including Ariane 5 ME.

Dordain, who hopes to have the industry proposals in hand by the November ministerial, believes the shift in acquisition approach would indeed lower the cost to develop a new launcher, a figure that France and Germany say is expected to be €3-5 billion. At a minimum, he expects ESA ministers to make a decision on the first phase of a next-generation launcher at the November meeting.

“I wish to know by at least the end of the year the architecture of the next-generation launch vehicle and the industrial team,” he says.

But while Dordain's cost-saving approach is sure to put pressure on existing suppliers to lower prices, tampering with ESA's current industrial return rules could alienate some of its key financial backers.

“If you change it so that development occurs in one location, it would be cheaper, but then it would not be European,” says Johann-Dietrich Woerner, head of the German Aerospace Center DLR. “We still think a European solution is the right solution. We should put all arguments on the table, including costs, including perspectives, and then decide.”

Charmeau says although Ariane 6 could serve as a pilot program for a new industrial arrangement among ESA stakeholders, pulling it together could take time.

“It could be very good for us to start working on technologies for Ariane 6 in parallel with [Ariane 5 ME], and it could very well lead to a decision for Ariane 6 in 2015,” when ESA is expected once again to meet at the ministerial level to set its multiyear spending plan.

But France has already put close to €200 million toward studies of a next-generation launch vehicle design in preparation for the November meeting. Emmanuel Terrasse, space policy adviser to the French higher education and research minister, Laurent Wauquiez, says the decision to continue with the Ariane 5 ME or to initiate development of a new launcher cannot be delayed.

“The key point is really the content and the type of launcher we want to have,” Terrasse said in March. “This decision cannot wait, it needs to be taken now, given the development times. It cannot be postponed until 2015,” he said, a position Wauquiez confirmed recently.

“These studies will permit Europe to be immediately operational when it takes the decision, next November, to begin development of whatever launcher is decided,” Wauquiez said in remarks accompanying the release of France's updated space strategy, a document that asserts that the current Ariane 5 system is unsustainable. “On this point, my position is clear: We must make the decision in an analytical way based on two objective criteria—the combined demand of government and commercial customers, and the reduction of cost,” Wauquiez said.

However, Charmeau says ESA's forthcoming decision does not have to pit Ariane 5 ME against a next-generation launcher.

“It's not one against the other: For the moment it is Ariane 5, then we go on with Ariane 5 ME, and we will be very glad if we can prepare for Ariane 6 with technology demonstrators,” Charmeau says.

But given that many European nations are still grappling with sovereign-debt crises or new governments, it is unlikely that ESA member states can afford to do both.